Coles to replace Bi-Lo stores

By Vanda Carson

THE new owners of Coles are creating a discount supermarket chain to replace the Bi-Lo discount stores, which were devastated by a botched rebranding attempt by the company's previous owners.

The new concept would be tested in "pilot stores" before being introduced nationally, Coles's managing director, Ian McLeod, told analysts last week.

He expects to bed down the format by the end of this financial year after testing whether shoppers responded to the lower prices and larger numbers of budget-price, own-label products in pilot stores.

The move is part of several trials at Coles supermarkets, now owned by Wesfarmers, including testing whether consumers accept a cut in product ranges of up to 30 per cent, meaning fewer brands will be stocked within each category.

It is trying out the idea in a store in Melbourne, and will expand this to between five and six stores if it goes well.

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The pilots of various new store formats will run for most of this financial year. Those that were successful will be introduced in the 2009-10 financial year, Mr McLeod said.

Woolworths already has more than 180 new-format stores which have wider aisles and more space for fresh food.

Coles is yet to decide on the design of its stores.

Its finance chief, Terry Bowen, said the company would also close up to 40 worst-performing Coles stores this year, and open a similar number.

Woolworths plans to add up to 25 supermarkets this financial year on top of expanding its existing stores, which have benefited from far greater investment in the past five years.

Analysts are concerned that Coles's new managers are not moving fast enough to refurbish stores while Woolworths is stepping up its spending.

Mr McLeod said he wanted to be sure he was spending his money wisely before committing to such a huge investment.

He said he had a lot of work to do to keep checkout queues short, ensure products were in stock, and install new computerised ordering systems. Woolworths already has these.

In relation to the proposed discount supermarket chain, he said the company would not repeat the mistakes of previous owners, whereby last year's rebranding of Bi-Lo into Coles outlets alienated budget-conscious shoppers.

A slump in Coles earnings in September last year was largely blamed on the failure. More than 70 Bi-Lo stores are still trading. About 130 were rebadged.

Mr McLeod said his predecessor, John Fletcher, had failed to keep costs low enough to entice consumers to shop at the rebadged stores.

"The customer is not stupid and they go elsewhere, and then you have got a business that starts to spiral downwards," he said. "We are not going to make those mistakes when we do the pilots in the chain store."

Shares in Wesfarmers hit a record low of $19.66 in intra-day trading on Friday, amid fears that its coal earnings could fall.